How Destructive is Innovation?

Daniel Garcia-Macia (IMF)

Chang-Tai Hsieh (Chicago and NBER)

Peter Klenow (Stanford and NBER)

Sources of Innovation Creative Destruction (Schumpeter, Aghion-Howitt, Grossman-Helpman) Apple vs. Blackberry/Nokia Amazon vs. independent bookstores/Borders Boeing 777 vs. Airbus A340 Uber vs. Taxi Google vs. Newspapers

Sources of Innovation New Varieties (Romer) Own-Variety Improvements Boeing 777 vs. Boeing 747 New iPhone models vs. older iPhone models

Sources of Innovation Entrants vs. Incumbents

How do we know? Case Studies Patent Citations Accounting Decomposition

Our Approach: Model with all three sources of innovation Infer contribution of each type of innovation from patterns of firm growth (LBD 1976-2013) Firms grow when they innovate Grow by “a lot” if creative destruction Grow by “a little” if own innovation Firms shrink when innovated upon

Main Findings Contributions to Aggregate TFP Growth Incumbents >> Entrants Quality Improvements >> New Varieties Own Innovation > Creative Destruction

Model: production and employment

Aggregate Output: 1 1

1

M

j jj

Y y q

Production of each variety: 1 1

j j jy l W q

Aggregate TFP:

11 1

11

1

M

jj

M q M

Varietyq Average Quality

Key idea: Firm innovation proportional to employment growth

1 1 1 1

1

fM

f j f fj

L W q W M q

Entrants:

Employment of entrants pins down combination of:

# Existing products improved upon by entrants # New products created by entrants

Quality of products made by entrants

DATA: Employment Share of Entrants

11, 1 , 1 , 11

, , ,

f t f t f tt

f t t f t f t

L M qWL W M q

Incumbent employment grows:

Steal existing product from another firm

Improve quality of own product

Create new product Incumbent employment falls:

Another firm steals its product

Wages rise

Incumbents: Own quality improvement vs. business stealing

11, 1 , 1 , 11

, , ,

f t f t f tt

f t t f t f t

L M qWL W M q

Own-variety improvement "modest" employment growth Business stealing "big" employment growth

Apple’s Employment (in the US) 2001: 11 K (iPod introduced) 2007: 23 K (iPhone introduced) 2008: 35 K 2009: 37 K 2010: 49 K (iPad introduced) 2014: 97 K 2015: 110 K 2016: 116 K

DATA: Distribution of Job Creation/Destruction

If only Creative Destruction

If only Own Innovation

Estimated Contributions to Growth (1976-1986)

Entrants Incumbents Creative Destruction 19.1 % 8.2 % 27.3 % Creation of New Varieties 0.0 % 7.6 % 7.6 % Own-Variety Improvements - 65.1 % 65.1 % 19.1 % 80.9 %

DATA: Employment Share of Entrants

DATA: Job Creation/Destruction Rates

Contributions to Growth: 1976-1986 vs. 2003-2013 1976-1986 2003-2013 Entrants 19.1% 12.8% Own-Variety Improvements 65.1% 76.7%